Wednesday, November 21, 2007

Every year, I anticipate the Wednesday-before-Thanksgiving Wall Street Journal almost as eagerly as Thanksgiving Day itself. Almost, but not quite.

But I do very much appreciate the Journal’s reprinting on the editorial page on this day the same two lead pieces that have appeared each year since 1961. The first, “The Desolate Wilderness,” is a chronicle, based on the account of William Bradford, of the Pilgrims taking leave of the port of Delftshaven in 1620, crossing the Atlantic, and settling in what became Plymouth Colony. Of the Pilgrims, the account ends: “If they looked behind them, there was a mighty ocean they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world.”

The second piece, “And the Fair Land,” was written by long-time WSJ editor Vermont Royster. The editorial ends this way:

"But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere -- in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

And we might remind ourselves also, that if those men setting out from Delftshaven had been daunted by the troubles they saw around them, then we could not this autumn be thankful for a fair land."

Each Wednesday before Thanksgiving when I read the two editorials – and, yes, we reread them again around the Thanksgiving table – I am reminded of the many things for which I have to be thankful, especially family, friends, and community. But I am also reminded, foremost, that the Pilgrims came here to enjoy the freedom they could not enjoy in the Old Country. Amidst the turkey and stuffing, football and basketball games, and day-after sales that now begin Thursday midnight, it is pretty easy to forget that, in a large sense, Thanksgiving is a holiday which celebrates freedom. And a day to be thankful we live in a country in which we are free to celebrate, or not, in any way we wish. This cannot be said to be the case in many parts of the world.

Of course, this Thanksgiving has us entering another political season, as always one with important choices to be made --choices that ultimately impact in significant ways the balance struck in our Republic between more or less individual freedom, or more or less government control. Striking the proper balance, one that protects individual freedom from government constraint, while giving government its due rein under our constitutional system to protect and promote our common interests, is our unending task.

In Federalist No. 10, James Madison warned, quite rightly, that “factions” would divide “society into different interests” representing different political philosophies. Ambitious men in different parties, he said, would seek to “vex and oppress each other.” This understanding of human nature’s dark side informed the Constitution the Founders bequeathed. The chief safeguard against those seeking to vex and oppress is our government of separated and diffused powers. We can be thankful that this constitutional regime has worked well —so far.

But Madison, acknowledging a “degree of depravity” in mankind, also suggested there are other qualities in human nature, which together he called “virtue,” which “justify a certain portion of esteem and confidence.” In Federalist No. 55, he admonished that, “Republican government presupposes the existence of these qualities in a higher degree than any other form.” Thus, he concluded: “Were the pictures which have been drawn by the political jealously of some among us faithful likenesses of the human character, the inference would be that there is not sufficient virtue among men for self-government; and that nothing less than the chains of despotism can restrain them from devouring and destroying one another.”

This Thanksgiving, as on each before, I am thankful that, almost four hundred years after the establishment of Plymouth Colony, that, so far, here in America, there has been sufficient virtue among us for self-government to thrive.

At the Free State Foundation, we proudly promote, through our research and educational activities, free market, limited government, and rule of law principles. While we are always respectful of those with other views, our work is guided by those bedrock principles.

We are most grateful for your interest in the work we do, and for your confidence and support. And, most importantly, in the spirit of freedom, we wish you a most Happy Thanksgiving!

Tuesday, November 20, 2007

In its hurry-up special session, the General Assembly has just passed the $1.4 billion tax hike that Governor Martin O’Malley wanted. As I have said previously, more should have done to put in place spending reductions prior to adopting such a large tax increase.

One new tax deserves special mention: The tax bill will make Maryland one of only nine states to tax computer services. The new law applying the sales tax to computer services is expected to raise over $200 million per year in revenue.

In the end, after landscaping, massage therapy, tanning salons, arcades, and all the rest were dropped from the tax bill, computer services are the only new services targeted for the new, higher 6% sales tax. Why? It is as simple as Willie Sutton’s reply when asked why he robbed banks: “Because that is where the money is!” According to a Washington Post article, Sheila Dixon, the Montgomery County Democrat who heads the House Ways and Means Committee, explained, “We feel a little trapped because of the amount of money involved.”

But where the money is now and where it may be in the future if the information economy is stunted and the tax base erodes are two different things. The difference between short term revenue fixes and sustainable, longer term prosperity.

“[A]ssuming simply for the sake of argument that the application of the sales tax is going to be expanded, targeting computer services doesn't make sense. Computer services play the --not "a"-- but "the" key role in the information economy. The types of services that would be impacted by the new tax are integral to the installation and maintenance of high-speed broadband networks upon which so much of today's information economy depends. By virtue of their importance in enabling the efficient and less costly delivery of other goods and services, computing services have a positive multiplier effect on the economy at large.Computer services constitute a segment of its economic base that Maryland should want to promote, not discourage, especially if the state wishes to compete with its neighbors such as Virginia, which have become world-class information economy hubs. The new tax will cause computer services firms, especially small ones that wish to grow, to consider moving to Northern Virginia or Pennsylvania, which don't tax such services.”

The Tax Foundation has just released its latest State Business Tax Climate Index. At No. 24, Maryland certainly doesn’t distinguish itself. Perhaps, more significantly and more relevant in assessing longer term economic impact, Virginia ranks 14th and Delaware 9th. Pennsylvania ranks 27th. The massive new tax hike is not likely to improve Maryland’s ranking.

And the special targeting of computer services in the tax package almost certainly will adversely impact what ought to be a concerted drive by Maryland to promote itself as a friendly venue for the high-tech information economy. Virginia certainly does so with vigor.

Had the General Assembly not been under the gun of the hurry-up special session, there is a good chance, upon more deliberate reflection, that it would have avoided taxing computer services. Indeed, in the legislation, it recognized the need to revisit this decision in five years. It should make a point of reconsidering much sooner than that.

Monday, November 19, 2007

I was away last week on a bit of a vacation when the story broke that Kevin Martin, the Republican Chairman of the Federal Communications Commission, wants to impose significant new regulations on cable operators. Chairman Martin seeks to use a 1984 law that gives the agency discretion to impose additional regulations on cable systems if necessary to “provide diversity of information sources” as the basis for the new regulations. Under the statute, the FCC may impose such additional regulations only if cable systems with 36 or more channels are available to 70 percent of American households and are subscribed to by 70 percent of the households to which such systems are available.

Although there has been nothing formal released by the agency, press leaks indicate that one of the new regulations Chairman Martin wants to implement would mandate more extensive unbundling of cable systems’ network capacity for use by unaffiliated third parties at highly discounted rates set by the government. And Martin has long agitated for government-mandated unbundling of tiered cable program services. This so-called “a la carte” regime would allow subscribers to purchase channels on an individual basis, so that unbundling regulation might be on the table as well.

Suffice it to say the thought of this new regulatory initiative almost ruined my vacation. It is yet another piece of what, for Chairman Martin, has become a seemingly single-minded pursuit of new regulation of the cable industry,

As a matter of sound policy, there is no need for additional regulation of cable operators. Indeed, in light of the increasingly competitive environment in which cable operators and other broadband providers of video, Internet, and voice services compete, many of the current regulations —adopted in a monopolistic environment— should be jettisoned.

And, as I have written on several occasions before, further regulation of the kind proposed by Martin raises serious free speech and property rights issues under the First and Fifth Amendments to the Constitution. A sampling of those constitutional objections may be found here and here.

But now I want to write primarily from an administrative law perspective. As a former Chairman of the American Bar Association’s Section of Administrative Law and Regulatory Practice, this perspective is important to me in a professional sense and one about which I have some expertise. This latest in a series of Martin-proposed regulatory assaults on cable operators risks compromising fundamental administrative law values, both as a matter of process and substance. There is a broader public interest, one that transcends the interest of any one company or any one industry segment, in maintaining the integrity of the agency’s decisionmaking process.

First, the core administrative law values of transparency and public participation in agency policymaking have been put at risk. According to leaks to the press, Chairman Martin proposes to have the agency regulate based on a determination that the second prong of the “70-70” test is met, that is, cable service is subscribed to by 70 percent of the households to which it is available. According to press reports, Chairman Martin is relying on data from one industry source, Warren Communications News, Inc., to support his conclusion that the second prong, cable subscribership as a percentage of homes passed by cable, has been met. Virtually all other sources reporting cable subscribership data point to a contrary conclusion that puts cable’s penetration of homes passed in the 60% range. This is consistent with the generally acknowledged and consistent findings, by the FCC itself among others, that cable operators’ share of the multichannel video market has been declining for several years in the face of stiff competition from other alternatives, including satellite television and the phone companies’ video service offerings.

It has now becoming evident —based on clarifying and qualifying statements made by Warren’s Managing Editor— that it is doubtful Warren’s subscriber data provide support for the conclusion Chairman Martin wants to reach. When they read the qualifying statements by Warren’s Managing Editor in the press concerning the limitations of the data, Commissioners Deborah Tate and Robert McDowell wrote to Warren asking that all information concerning Warren’s data be filed in the public record.

The question whether the FCC should impose significant new regulations on cable operators is far too important to be left to conclusory back-of-the-envelope calculations that contradict the calculations based on nearly every other data source. In light of the questions that already have been raised about the use to which the Warren data is being put, it is imperative, as Commissioners Tate and McDowell have requested, that all clarifications and qualifications regarding the data’s limitations be put on the public record and subjected to scrutiny by all interested parties.

Transparency and public participation are core requirements of administrative due process. Absent the ability of the public to receive notice of, and to examine, all the underlying data and accompanying caveats upon which key regulatory factual findings are supposedly premised, the ability of the public to participate meaningfully in the agency’s process is negated. The integrity of agency’s decisionmaking process is compromised. This is especially so when the proposed draft factual findings which are the subject of leaked press reports run counter to the findings based on data from most other sources.

Another core administrative law value, this one substantive, relates to the rationality of the agency’s decisions as it exercises its discretion under delegated statutory authority. It is important to understand that even if the second prong of the 70-70 test were met, at most the Communications Act only allows the FCC to impose new regulations; it does not mandate them. And, significantly, the FCC is authorized to do so only if additional regulation is “necessary to provide diversity of information sources.”

In today’s era of media abundance, now including the Internet among all the others, it is simply not rational to suggest more regulation is needed to provide a diversity of information sources. There —apparently— always will be some who will suggest, despite the reality of the media marketplace, that Americans don’t have access to a diversity of viewpoints on important public issues. This position is no longer tenable, if it ever was. It would be untenable if only the average cable system, with its hundreds of program channels, were to be considered. But when terrestrial broadcast radio and television stations, satellite radio and television, wireless information providers, the Internet, newspapers, magazines, and the rest are thrown in, it is distinctly irrational to suggest a lack of diversity of information sources.

In the last of its Video Competition Reports, released in March 2006, the FCC concluded: “The market for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” Based on its collection of a comprehensive set of data, the Commission summarized its findings this way:We find that almost all consumers have the choice between over-the-air broadcast television, a cable service, and at least two DBS providers. In some areas, consumers also may have access to video programming delivered by emerging technologies, such as digital broadcast spectrum, fiber to the home, or video over the Internet. In addition, through the use of advanced set-top boxes and digital video recorders, and the introduction of new mobile video services, consumers are now able to maintain more control over what, when, and how they receive information. Further, MVPDs of all stripes are offering nonvideo services in tandem with their traditional video services.

Marketplace developments since the agency published that finding have only led to the availability of more consumer choices, especially as the telephone companies such as Verizon and AT&T, are now rolling out their video offerings with increasing robustness. An abrupt reversal of course by the agency to make a contrary determination would simply not be supported by the evidence. In traditional administrative law terms, it would be arbitrary and capricious and an abuse of discretion for the FCC to conclude that it is necessary to impose additional regulation to provide a diversity of information sources.

There are many familiar policy and legal objections to Chairman Martin’s latest stratagem to impose new regulations on cable operators. But in an important way that ought not to be ignored there are also not-so-familiar objections that sound in administrative law. And the sound is one in which core administrative law values of transparency in decisionmaking, the ability of the public to participate meaningfully in the rulemaking process, and the rationality of the policymaking process are jeopardized in a way that threatens to harm not only cable operators, but, more importantly, the institutional integrity of the FCC.

Thursday, November 08, 2007

Maryland faces a looming budget deficit in the $1.5 billion range, and Governor Martin O'Malley called the legislature, heavily controlled by the Democrats, into a special sesion to try to deal with deficit. A day or so ago, completely out of the blue, the Maryland Senate Budget and Taxation Committee proposed for the first time to apply the state sales tax to computer services.

This is surely a stupid idea that doesn't compute.Under the Senate Committee proposal, computer services would be lumped with landscaping services and arcades to take the new 6% sales tax hit. Computer services include computer facilities mangaement, computer programming, systems integration, computer disaster recovery, and hardware and software installation and maintenance.

Several points need to be made here about what is going on in the Maryland special session:

First, there has not been enough serious hard-nosed discussion by the Governor and General Assembly concerning meaningful spending cuts to reduce the budget deficit. Before considering widespread and significant tax increases of the kind now being considered, the Governor and legislators should show a heretofore lacking seriousness about controlling spending. In their minds, the burden of closing the deficit predominantly falls on the tax side.

Second, the way in which the proposed new tax on computing services popped up out of the blue illustrates the pitfalls of trying to develop rational tax and budget policy on the fly during a hasty special session. There have been no hearings on the impact of taxing computer servcies for the first time. Or for lumping them with landscaping and arcade services, while dropping tanning salons, massage therapy, and health clubs from the proposed expanded tax net.

Third, assuming simply for the sake of argument that the application of the sales tax is going to be expanded, targeting computer services doesn't make sense. Computer services play the --not "a"-- but "the" key role in the information economy. The types of services that would be impacted by the new tax are integral to the installation and maintenance of high-speed broadband networks upon which so much of today's information economy depends. By virtue of their importance in enabling the efficent and less costly delivery of other goods and services, computing services have a positive multiplier effect on the economy at large.

Computer services constitute a segment of its economic base that Maryland should want to promote, not discourage, especially if the state wishes to compete with its neighbors such as Virginia, which have become world-class information economy hubs. The new tax will cause computer services firms, especially small ones that wish to grow, to consider moving to Northern Virginia or Pennsylvania, which don't tax such services.

Perhaps it might make sense, assuming taxes must be raised at all, to tax arcades or tanning salons. But taxing computer services doesn't make sense.If Maryland's legislators take the time necessary to develop sound budget policy, they will realize that this is one tax that doesn't compute!